The Ultimate ''Real'' Death Cross: Stranger Still

July 19, 2012

by Doug Short

I received a number of emails following my illustrations of the "Ultimate" Death Cross, a bizarre concept referenced by Societe Generale analyst Albert Edwards: the 50-200 month moving-average crossover in the S&P 500. That's right. Not day, not week, but month.

The question I was asked repeatedly is this: What would this indicator look like if we adjusted for inflation? Well, I couldn't resist having a look myself. Here are the same two charts I posted earlier this week, but now adjusted for inflation using the Consumer Price Index as the deflator.

Yes, the real (inflation-adjusted) version dropped us into the "Death Zone" twice since the inception of the S&P 500 in March 1957. The first plunge into the Death Zone lasted from the summer of 1974 to December of 1986. The second "Death Dip" started in August of 2010, long after the two savage declines in the index and three recessions since the first 12 1/2 year encounter with Death. That earlier trip to the zone did capture some of the decade of stagflation, but it was clearly not a money-maker for market timing. The second dip was even worse for timing the market or understanding the economy.

And now the longer look back, courtesy of the S&P Composite data set popularized by Yale professor Robert Shiller. It consists of the monthly averages of daily closes since 1871 -- over 140 years of US market history.

As the tone of my post suggests, I find this "ultimate" variant of the 50-200 day moving average -- nominal or real -- to be a strange curiosity and (at the risk of being tediously repetitious) completely worthless as an indicator for the market or the economy.